Fidelity Sees Bank of Canada Raising Rates After Bernanke

Sept. 13 (Bloomberg) -- Fidelity Investments says the Bank
of Canada may raise interest rates after the Federal Reserve
does as economic growth in the U.S. outstrips that of its
northern neighbor.

Slower growth has prompted Bank of Canada Governor Stephen
Poloz to say in policy statements that higher rates depend on
signs of sustained growth, even as he retains a policy-statement
warning added a year ago by his predecessor that the bank’s next
move will be to raise rates. In the U.S., accelerating growth
has caused Fed Chairman Ben S. Bernanke to signal he’ll probably
begin reducing monetary stimulus this year, while policy makers’
forecasts indicate the key rate won’t be raised until 2015.

“With sluggish growth in Canada, I would not expect the
Bank of Canada to be hiking rates through 2014,” Brian Miron, a
portfolio manager in Merrimack, New Hampshire, at the fixed-income unit of Fidelity Investments, said yesterday at an
investor round-table at the Bloomberg Canadian Fixed-Income
Conference in New York. Fidelity managed $1.77 trillion as of
June 30. “You can make the argument that with fundamentals
being softer in Canada, the Fed might be the first to hike. You
can see that case being made.”

The Fed has been buying $85 billion of Treasury and
mortgage bonds each month in an effort to push down borrowing
rates and stimulate the economy. It will decide at its meeting
Sept. 17-18 to taper the purchases to $75 billion, according to
a Bloomberg survey of economists on Sept. 6.

Economic Divergence

The U.S. economy will expand 1.6 percent in 2013, while
Canada will experience 1.7 percent growth, according to
forecasts in Bloomberg economic surveys. Then the U.S. will pull
ahead, gaining 2.7 percent in 2014 and 3 percent the following
year, while Canada grows 2.3 percent and 2.7 percent, the
surveys estimate.

The prospects for slower Canadian growth also have Franklin
Templeton Cos.’ Bissett Investment Management saying Poloz will
probably let Bernanke make the first move. Canada’s central bank
is leery of allowing its dollar to appreciate versus the U.S.
currency because that would hurt exporters.

“The Bank of Canada is in a corner here,” Calgary,
Alberta-based Thomas O’Gorman, Bissett Investment fixed-income
chief, said at the round-table. “With the impact of the dollar
in getting that far out in front of the Fed, I’d say the Fed
probably goes first.”

RBC Floaters

Elsewhere in credit markets, Royal Bank of Canada issued
C$5 million of floating-rate notes maturing in September 2018
yielding 10 basis points, or 0.10 percentage point, more than
the Canadian dealer offered rate.

The extra yield investors demand to own the debt of
Canadian investment-grade corporations rather than the federal
government was unchanged yesterday from a day earlier at 125
basis points, according to the Bank of America Merrill Lynch
Canada Corporate Index. Yields fell to 3.41 percent, from 3.42
percent on Sept. 11.

Spreads on provincial bonds held steady at 73 basis points
more than federal-government debt, according to Bank of
America’s Canadian Provincial & Municipal Index. Yields declined
one basis point to 3.22 percent.

Debt of Canadian corporations has lost 1.3 percent this
year, compared with a drop of 4.6 percent for provincial bonds
and a decline of 3.5 percent for federal-government securities.

Benchmark Rates

The Fed has held its rate target for overnight lending
between banks at a record-low zero to 0.25 percent since 2008.
Fifteen of the 19 participants on the Federal Open Market
Committee, in Fed economic forecasts released in June, expected
the first rise in the rate to occur in 2015 or later.

The Bank of Canada, which has held its rate at 1 percent
since September 2010, will probably increase it by the end of
2014, according to a Bloomberg survey with 18 responses.

Canadian 10-year bonds yield 2.77 percent, compared with
2.89 percent for benchmark 10-year U.S. Treasury notes. The mean
spread is about five basis points this year.

In another sign of the two nation’s diverging fortunes,
Canada’s jobless rate is now projected to be higher than the
U.S. in 2014, a Bloomberg News economist survey shows. That
would end a five-year advantage touted by policy makers as
evidence of the country’s stronger economy.

Unemployment in Canada will average 7 percent next year
according to the median estimate in a survey with 15 responses
gathered from Sept. 6 to Sept. 11. A separate survey forecasts a
6.9 percent jobless rate in the U.S. next year.

Canada’s employment growth this year is on track to be the
slowest since 2001, outside of the last recession, as
manufacturers and governments fire workers to cut costs. The
U.S. is now tapping pent-up demand after a much deeper slump,
while Canadian consumers curb record debts and struggling
exporters delay investments.